Large firms need to review payment practices to SMEs now

The Small Business Enterprise and Employment Act (SBA) received royal assent in March and introduces wide-reaching measures, designed to open up opportunities for SMEs.

In an effort to improve the accessibility of SME finance, the SBA now places an obligation on large firms to report on their payment practices and policies.But what exactly does this new requirement mean and will it have the desired effect?

Late payment has long been recognised as a hindrance to the cash flow of SMEs and, as a result, their access to finance. By placing larger organisations under a more stringent duty to report on their performance, through reference to their payment practices and policies, the government hopes to strengthen payment transparency and ultimately better the terms upon which SME suppliers receive payment.

Secondary regulations still need to prescribe the details of this change but the legislation suggests that large firms could now be required to report on a number of payment factors, such as the average time taken to pay, proportion of invoices paid beyond agreed terms and the amount of late payment interest owed and paid.

The government has provided an indicative format for a report and the current intention is that reports will need to be provided in open data format to a single, central, digital location on a half-yearly basis.

The government has said it will work with stakeholders in the coming months to design a system that is as business and user-friendly as possible.

While the change may not make particular payment terms mandatory, the duty to report on such terms invokes a "name and shame" transparency that could end up achieving the same result. The proposed regulations are therefore aimed at increasing competitive pressure to improve payment terms in line with peers and reduce the disparity in bargaining power between the different tiers that make up UK supply chains.

The enabling regulations are anticipated to apply from April 2016. However, it is strongly recommended that firms begin to consider their current payment practices and start to assess whether they should be undertaking any changes to the way in which they manage their supply chain payments. The increased management time and cost associated with the duty to report on payment terms should also be factored in.